W. P. Carey Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. W. P. Carey is a global REIT focused on long-term sale-leaseback and build-to-suit financing, with Owned Real Estate and Investment Management segments. Its owned net-lease portfolio comprised 914 properties, 221 tenants, 92.8 million square feet, 98.8% occupancy and a 9.4-year weighted-average lease term.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $217.3 million | $238.1 million | $487.5 million | $458.5 million |
| Net income attributable to W. P. Carey | $51.7 million | $63.3 million | $109.1 million | $99.5 million |
| Diluted earnings per share | $0.48 | $0.59 | $1.02 | $0.93 |
| AFFO, non-GAAP | $132.2 million | $139.0 million | $271.7 million | $269.0 million |
- Q2 revenue fell about 9% and attributable net income fell about 18%; first-half revenue increased about 6% and attributable net income increased about 10%. Q2 AFFO declined about 5%; first-half AFFO increased about 1%.
- First-half operating cash flow was $236.2 million, versus $216.1 million. Investing used $214.6 million; financing used $6.4 million. Cash and cash equivalents ended at $173.3 million.
- Total debt carrying value was approximately $4.64 billion, up from $4.48 billion at December 31, 2015. The revolving credit facility had $706.2 million of unused capacity. The company reported compliance with its debt covenants.
- Total assets were $8.68 billion. The company declared a Q2 distribution of $0.98 per share, equivalent to $3.92 annualized, paid July 15, 2016.
Material changes and unusual items
- Owned Real Estate first-half revenue rose to $403.8 million from $356.7 million, mainly reflecting $32.2 million of lease termination income recognized in Q1 and acquisitions. Investment Management revenue fell to $83.7 million from $101.8 million, primarily because of lower structuring revenue amid reduced investment volume for Managed REITs.
- Q2 included $35.4 million of impairment charges on 14 properties classified as held for sale, including $10.2 million allocated to goodwill. The properties’ carrying values were reduced to estimated fair value. Assets held for sale totaled $276.3 million at quarter-end.
- First-half results included $18.9 million of gains on real estate sales, including a $16.4 million gain from transferring a vacant international property and its related mortgage to the lender. The transfer involved property carrying value of $39.8 million and debt of $60.9 million.
- First-half restructuring and other compensation costs were $11.9 million, including costs related to the CEO’s departure, the former CFO’s employment termination and a workforce reduction. The company also incurred $5.3 million in strategic-review fees; the review was completed in May 2016.
- A $7.1 million allowance was recorded against one direct financing lease due to reduced expected tenant payments and possible early termination. Accumulated other comprehensive loss increased, including a $30.2 million first-half foreign-currency translation loss.
Outlook, risks and contingencies
- Management said it expects cash from operations and equity distributions to meet normal liquidity needs, with cash, property-sale proceeds, revolving-credit capacity, and potential debt or equity issuance available as funding sources. The filing text does not provide a clear numeric full-year AFFO guidance range.
- Management identified $661.1 million of mortgage balloon payments among expected cash requirements over the next 12 months; the term loan facility was scheduled to mature in January 2017, with an extension option. Management anticipated refinancing or repaying international mortgage maturities using cash resources, revolver capacity and property dispositions.
- Brexit was identified as a material risk: currency volatility, economic deterioration, regulatory or tax changes, and effects on tenants could adversely affect operations and results. At quarter-end, 5.0% of net-lease ABR was from the U.K. and 27.5% from other EU countries; management said it hedged part of its sterling and euro exposure.
- Other exposures include interest-rate and foreign-exchange risk, tenant credit risk, and fundraising risks for non-traded managed vehicles. New FINRA rules and the Department of Labor’s fiduciary regulation could affect demand and fundraising. The company noted the U.S. dollar’s strength against sterling and uncertainty around Brexit’s eventual effects.
- The company reported no material litigation; ordinary-course claims were not expected to have a material adverse effect. Disclosure controls were judged effective at a reasonable level of assurance.
Important facts for investors to verify
- Whether AFFO and recurring cash generation support the distribution, particularly given the difference between GAAP earnings and the company’s non-GAAP AFFO measure.
- Progress on refinancing or repaying near-term mortgage maturities and the January 2017 term loan, alongside the increase in revolver borrowings.
- Sale outcomes and realized losses or gains for the held-for-sale properties, including the 14-property portfolio impaired in Q2 and the subsequent $175 million sale disclosed in the filing.
- Tenant payment expectations and recovery prospects for the direct financing lease subject to the $7.1 million allowance.
- Effects of lower Managed REIT investment activity, regulatory changes and Brexit-related currency or tenant impacts on Investment Management revenue and the international portfolio.